Why Do Some Small Businesses Pay Less Tax?

Here it is: Given the same amount of profit, not all businesses pay the same amount of taxes.

Think about that.

It’s probably something that you’ve always wondered about, maybe were even a bit suspicious about. Well, if you always thought that some people pay less tax than you (even though they make the same amount of income), you are correct.

Why is that?

Is it fair? Is it right? Is it legal?

Yes, it is legal for one business owner to pay less tax than another business owner, even though both have the same income.

And why does this happen? I’m going to answer this question by telling you about the easiest (and perhaps the most overlooked) tax-reduction strategy on the books. Many small business owners are paying too much tax, simply because they own the “wrong” type of business.

I’m not talking about “type” in the sense of whether you own a carpet cleaning business vs. a pet store. I don’t mean what kind of industry your business is. I don’t mean whether you are a manufacturer, a wholesaler, a retailer, or a service business. I’m talking about whether your business is a sole proprietorship, a partnership, a C corporation, an S corporation, or a limited liability company (LLC).

There are several “types” of business ownership, from a legal entity standpoint. And you have got to get this right, or you will pay literally thousands of dollars more in taxes than you should. The simple fact is, there are significant differences in the amount of taxes that each of these business “types” usually pay.

Sole proprietors are especially vulnerable to overpaying their taxes simply because they are sole proprietors. So if you are a sole proprietor (you file Schedule C), I must ask you this question: Have you ever done an analysis of the tax consequences of operating your business as a partnership, a corporation, or an LLC? This is known as the Choice of Entity analysis, and this analysis is a great place to start on the journey of small business tax reduction. It could be the best thing you ever do for yourself and your business.

This could be the ideal time to take a close look at the pros and cons of incorporating your business. And, if you have already incorporated, this is the ideal time to make sure you have the best kind of corporation for your particular situation. You should be asking yourself this question: C Corp, S Corp, or LLC – which one is best for me?

To help you make this decision, I’m offering a free 30-minute phone consultation, so you can discuss the specifics of your particular situation with a tax professional with over 25 years experience working with small business owners and self-employed people.